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Crowdfunding As a Capital Source for Women Entrepreneurs

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Crowdfunding As a Capital Source for Women Entrepreneurs REPORT May 2, 2017 CROWDFUNDING AS A CAPITAL SOURCE FOR WOMEN ENTREPRENEURS Prepared for: Submitted by: The National Women’s Business Council A2F Consulting LLC Solicitation Number: SBAHQ-16-M-0120 DUNS Number: 944546386 The statements, findings, conclusions, and recommendations found in this study are those of the authors and do not necessarily reflect the viewsPage of the1 National Women’s Business Council, the United States Small Business Administration, or the United States Government. Fall 08 7220 Wisconsin Avenue, Suite 210, Bethesda, MD 20814, USA Tel (+1) 301-907-9400 - [email protected] - www.a2f-c.com 2017 14 TABLE OF CONTENTS 1. Study Rationale ............................................................................................................... 3 2. Data Availability .............................................................................................................. 6 2.1. Overview of the Crowdfunding Platforms ........................................................................... 6 2.2. The Data Perspective ........................................................................................................... 9 3. Gender Analysis of Kickstarter Data ............................................................................ 11 3.1. Methodology ..................................................................................................................... 11 3.2. Results ............................................................................................................................... 15 4. Further Insights from Academic Research .................................................................... 22 4.1. Market Access ........................................................................ Error! Bookmark not defined. 4.2. Market Dynamics .............................................................................................................. 27 4.3. Determinants of Success .................................................................................................... 34 5. Outlook for Future Policy Research .............................................................................. 39 6. Bibliography .................................................................................................................. 43 7. List of Researchers and Platforms Interviewed ............................................................ 49 Appendix 1: On Web Scraping .......................................................................................... 50 Appendix 2: Descriptive Analysis ...................................................................................... 53 2 1. STUDY RATIONALE This research was commissioned by The National Women Business Council (NWBC) to explore the distinct relationship between crowdfunding and women entrepreneurship, and develop a deeper understanding of crowdfunding as capital source. The research aims to: i) identify and document available demographic and other descriptive quantitative information on crowdfunding, including equity crowdfunding; ii) identify gender differences in crowdfunding in terms of industry, goals, investors, platforms used, and success; iii) document existing policies that may support or hinder women’s participation in crowdfunding campaigns; iv) provide additional information and guidance to women entrepreneurs seeking to raise capital through crowdfunding; and v) provide policy recommendations for supporting women entrepreneurs. This will be carried out by synthesizing existing theoretical and empirical literature and analyzing available data on crowdfunding. Crowdfunding is an alternative finance solution that attempts to fill the gap left by traditional financing sources, especially as it relates to small and medium enterprises (SME) financing needs. Despite the fast growth, the crowdfunding market is still in a nascent stage of development, where future policies and regulations will be shaped by the behavior and experiences of funders and entrepreneurs. As with any new market, it will be prone to distortions caused by the behavior of market participants that expose funders – or in the case of equity crowdfunding - investors to risk. This is why equity- based crowdfunding has, until recently, been the domain of accredited investors (individuals with a large net worth, who can presumably “afford” potential losses). Future studies on the behavioral, as well as traditional economics of crowdfunding, will also play a significant role in the future of the crowdfunding market. The crowdfunding landscape will continue to evolve as legislators seek reforms aimed at addressing these issues and investor protections as the platforms themselves look to introduce mechanisms that assuage investors’ fears. 3 The crowdfunding market is growing and evolving at a rapid pace. In 2011 crowdfunding platforms raised nearly USD 1.5 billion and funded more than one million successful campaigns, most of which were based in Western Europe and North America. By 2015, the total funds raised reached USD 34 billion.1 Currently, over 70% of this amount consists of lending-based models. However, equity-based models are expected to lead growth in the market over the near-term, following the relaxation of SEC rules on equity crowdfunding. Indeed, according to Statista, equity-based crowdfunding transaction volume is expected to increase at a rate of 40% annually between 2016 and 2020 in the U.S., rising from 2.1 billion to 8.5 billion over the same period. Regionally, total crowdfunding is dominated by North America at USD 17.3 billion, accounting for 50% of the world’s crowdfunding. This is followed by Asia (30.6%) and Europe (18.9%).2 There are currently four types of crowdfunding models: donation-based, rewards- based, lending-based, and equity-based. All models are facilitated through online platforms, where ordinary people, groups, entrepreneurs, and businesses can publish their projects, allowing them to raise money from the crowd. These different forms of crowdfunding use different funding mechanisms, project types, participant profiles, and requirements. Hence, the benefits of different crowdfunding models are likely to differ between entrepreneurs and businesses as well as during different stages of business growth. It is, therfore, important to understand the basis of the crowdfunding platforms. A key difference between the platforms is how they are regulated. Both donation-based and reward-based crowdfunding models are unregulated, whereas lending-based and equity-based crowdfunding models are regulated. 1 http://crowdexpert.com/crowdfunding-industry-statistics/ (Accessed 8th of September 2016) 2 http://crowdexpert.com/crowdfunding-industry-statistics/ (Accessed 8th of September 2016) 4 This report is organized as follows: i) a brief overview of platforms; ii) detailed review of the existing literature; iii) insights into the data perspective and data availability, as well as common challenges facing researchers regarding data; iv) descriptive analysis of pre- scraped datasets using data from Kickstarter (i.e. one of the largest reward-based crowdfunding platforms in the U.S.); and v) conclusion. Literature review and descriptive analysis constitute two primary sections of this report. The literature review synthesizes existing research related to crowdfunding as a capital source, with a focus on women-run crowdfunding campaigns and descriptive analysis that incorporates high- quality sources of available data to analyze the observed patterns and provide an in- depth description of crowdfunding as capital source. In the conclusion section, we summarize the key findings from the literature and descriptive analysis, as well as policy directives derived from the research. 5 2. DATA AVAILABILITY 2.1. OVERVIEW OF THE CROWDFUNDING PLATFORMS Kickstarter and Indigogo are the two largest reward-based crowdfunding platforms in the world. Kickstarter is a U.S.-based crowdfunding platform founded in 2009. The company’s stated mission is to help bring creative projects to life. Kickstarter has reportedly received USD 2.6 billion in pledges from 11 million backers and is the largest reward-based crowdfunding platform in the world. Indigogo, another U.S.- and reward- based crowdfunding platform founded in 2008, was one of the first to offer crowdfunding. Indiegogo allows people to solicit funds for an idea, charity, or start-up business through two optional business models; namely “keep it all” and “all or nothing”. Among lending-based platforms, Prosper and Kiva are among the most prominent. Kiva is a non-profit organization that allows people to lend money via the internet to low-income entrepreneurs and students in over 80 countries. Kiva provides 0% interest loans to borrowers and its key mission is to “connect people through lending to alleviate poverty”. Since 2005, Kiva has raised more than 1.5 million loans totaling in excess of USD 900 million. Prosper on the other hand, has been a more attractive platform to investors. Interest rates on Prosper range from 4.32% to 11.25%, depending on the loan term and borrower rating. Since its inception, Prosper has raised about USD 915 million for nearly two million borrowers. Equity-crowdfunding is rather new in the U.S. and the largest platforms to date are based in Europe and Australia. Crowdcube is one of the largest equity crowdfunding platforms in the world. It is based in the United Kingdom (UK) and was established in 2011. The platform has approximately 300,000 users searching
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